Investing cycle Flashcards
What are examples of prepaid expenses
- Prepaid insurance
- Prepaid rent
3.Prepaid interest
What is the typical inherent risk associated with prepaid expense?
- Generally assessed as low, because of its simple accounting treatment.
- Also, balances are usually not material, limiting audit work over these accounts.
Control risk assessment.
Well prepaid expense are processed through the purchase procedures.
While purchasing, you should ensure each item is properly authorized and recorded.
What are the main assertions related to prepaid insurance?
Valuation: Determine unexpired portion of policy and insurance expense
Right and obligations: Confirm policy beneficiary with the insurance broker
Existence and completeness: Confirm policy with insurance broker, examine supporting source documents
Classification: Determine the propriety of distribution between manufacturing overhead and SG&A
What document is obtained, to test prepaid insurance account?
Detailed schedule of prepaid insurance account
What makes PP&E a high-risk audit area?
Materiality, complexity, and frequent errors in prior audits.
Why is a substantive approach used for auditing long-term debt?
Because transactions are few but material.
What controls should be in place for fair value measurement?
Segregation of duties, qualified valuation specialists, change control procedures.
Why is the inherent risk for intangible assets and goodwill generally assessed as high?
Because of complex accounting rules, subjective valuation, and difficult impairment testing.
Why is petty cash usually not audited substantively?
It is immaterial and better assessed via control procedures.
How is prepaid insurance tested?
By confirming policy with the broker and determining the unexpired portion.
What type of audit evidence is most important for intangible assets and goodwill?
Tests of details.
What documents verify authorization of debt issuance?
Board minutes and executed agreements.
What increases inherent risk for complex debt instruments?
Hybrid features and lack of market comparability.
Who is responsible for fair value measurement and disclosure of intangible assets?
Management.
What increases control risk in the business acquisition process?
Infrequent transactions and lack of experienced staff.
What are examples of intangible assets?
Trademarks, copyrights, patents, customer lists, franchises.
What assertion is tested by confirming the policy beneficiary?
Rights and obligations.
What is a cutoff bank statement?
A statement covering 7–10 days after period-end to verify clearing of items.
How does U.S. GAAP treat crypto?
At fair value with changes flowing through P&L.
When is quantitative impairment testing required?
Only when qualitative assessment indicates that impairment is more likely than not.
How is occurrence tested for equity without outside agents?
Trace transfers to share register and review share certificates.
What method is typically used to amortize bond premiums or discounts?
The effective interest method.
